PlaneBusiness Banter by Holly Hegeman – 4.25.12

The following article, which explains our current situation better than any article we’ve seen to date, was written by the editor and publisher of PlaneBusiness Banter, Holly Hegeman. Before Holly founded PBB, one of her jobs consisted of working as a consultant to then-former Chairman and CEO of American Airlines, Robert Crandall from 1994-95. She authored the ’94 AMR Annual Report with Crandall. Holly’s complete bio can be found at the end of this article. This has been reprinted with permission by Holly.

PlaneBusiness Banter
By Holly Hegeman, Editor
25 April 2012

Unless you were in a cave last week, you know why I found myself transfixed in front of the laptop Friday morning as I read the joint release issued by the APA, the APFA, and the TWU, which came rolling in at about 8:15.

It began,

"On behalf of nearly 55,000 American Airlines front-line employeesóincluding the 17,000 members of the Association of Professional Flight Attendants, the 10,000 members of the Allied Pilots Association and the 26,000 members of the Transport Workers Unionówe are pleased to confirm our support of a possible merger between our airline and US Airways. We have reached agreements on terms sheets for collective bargaining agreements that would govern the American Airlines employees of the merged airline with US Airways."

From that point on, Friday was one hell of a day.

And yep, I learned something.

I learned that American Airlines is working with Harvey Miller. If there is not a quicker way to send a chill down the back of any union member, and/or cause them to flee in the opposite direction, I don’t know what it could be.

Who is Harvey Miller? He is AMRís lead restructuring attorney. He was also Frank Lorenzoís lawyer at Continental and Eastern Airlines.

No wonder the unions believe that the AMR "vision" as APA President Captain Dave Bates wrote last week in a letter to his members, "quite simplyóconsists of rejecting our contract entirely."

Just as American CEO Tom Horton told Reuters recently that this was not his first "rodeo" — nor is it Harvey’s either.

No question that American’s decision to include Harvey on the legal team was a very ill thought-out one. Yet another move that has served to push its employees in the opposite direction.

If you want to read a very thorough explanation of why the Allied Pilots Association signed on the dotted line, in addition to answers to a number of questions about a potential deal, this particular release from the APA will be helpful.

By the time Friday was over, it was clear we had witnessesed something we have never seen happen before in this industry. Union leadership of the three major unions at American Airlines, which represent roughly 55,000 of the airline’s 70,000 or so employees, announced, in unison, that they had signed term sheets with US Airways, and were fully behind that airline’s attempt to merge with American Airlines.

As Captain Dave Bates with the Allied Pilots Association said in a statement,

"Working with US Airways, APA was able to achieve in just over a week far more than we had been able to achieve in more than five years of trying to bargain with AMR management. Our interaction with US Airways was in stark contrast to what we have been experiencing with AMR. We dealt directly with the people whose jobs are to run an airline. Many of the talks consisted of president-to-president interaction. In accordance with the APA Constitution and Bylaws, there were always two members of the APA Negotiating Committee present during these negotiations. Completely absent from the discussion were the posturing and game-playing that characterizes the approach AMR management takes when dealing with us."

Make no mistake about it, contrary to the "Wizard of Oz" approach that management at American took towards the news, ("Don’t pay any attention to that man over there in the corner….we are the great and powerful Oz) this was a big deal.

However, as I cautioned Twitter followers Friday, this was not the announcement of a merger. Far from it. Lots of road to travel between now and then.

But it was certainly a huge step in that direction.

More today on where we see the process heading at this point, and we give you our best shot at what we think we will see happen next.

AMR Bankruptcy Follies Take a More Serious Turn

In this week’s AMR Bankruptcy Follies we don’t have any "suspicious" letters from the American VP of Flight Ops being sent to advisers, bankers, and then "leaked" to the media. We are not going to talk about politicians being asked to go public with exhortations to leave American Airlines alone (directed at potential suitors from out of town.) We are not even going to get into a dissection of the latest missives from management sent out to AMR employees which, by themselves, could have provided enough fertile fodder for our weekly column.

No, this week I think it’s time to get a little more serious.

Because what happened last Friday was serious. In fact, it was unprecedented in terms of airline labor/management relations.

But first — we would be remiss if we didn’t go back and get you caught up on "The Hale Memo." I simply can’t help myself. Without this bit of levity this column would be entirely too serious.

As we wrote here last week, we seriously doubted that American’s VP of Flight Ops John Hale had actually written this masterpiece. Or if he did, he had received a lot of "assistance." Because the letter, and its assumptions simply did not jive with what I knew was the case with the pilot group.

Last week, Mr. Hale wrote,

"I’ve been asking a lot of our pilots about their reaction to all of the speculation and I believe our pilots have very serious concerns about a US takeover bid. Comments I heard recently include: there is no upside and lots of risk: US has a history of broken promises; operationally it offers us nothing; and it opens the door to even more long-term uncertainty for pilots."

He continued,

I’m confident pilots will continue to be very skeptical about US’s ability to integrate separate workforces or grow the combined company. The phrase "all hat and no cattle" comes to mind. There’s little indication from anyone I’ve spoken to that a takeover by US would produce greater opportunity for our pilots than American’s business plan."

Reads positively ridiculous in the light of last week’s events, doesn’t it?

We called it out for what it was last week — and last Friday I think our "hunch" was confirmed.

According to a number of sources I talked to this last week the letter was, indeed, essentially written and then given to Hale to sign and send.

I’d say Mr. Hale’s credibility has taken a rather stiff hit.

And management at AMR wonders why its employees do not trust them. Nor do they want to have anything to do with them.

Moving on, in our last issue I wrote that I thought we would hear more last week concerning the planned deal that US Airways has put together — the one they have been discussing with labor leaders, finance types, Wall Street analysts, and others.

But no, instead we heard from the American labor leaders themselves — and not only did we hear from them, we were informed that all three unions had in their hands signed term sheets with US Airways.

In a move that could only be described as bold, resilient, and pretty damn courageous, AMR’s three unions publicly expressed their unified endorsement for a merger with US Airways.

I donít know about you but when I first saw this news come across the wire Friday morning, I heard the faint soundtrack from the movie "Rocky" in my head (or insert your favorite epic "Underdog-Wins-The-Day" movie here).

While it was already known that Doug Parker and his team had hired "advisors" and were "studying the transaction," this news blew all of that out of the water. While it had been obvious of late that there was clearly a cohesive "all for one and one for all" mentality that was coming from the three union groups at American — the news that all three had agreed to terms with the folks in Phoenix was pretty amazing.

In effect, all three labor groups had overwhelmingly spoken: We have no faith in the ability of the current management team at AMR to manage the airline effectively. Furthermore, they then had gone even further and endorsed the management team at US Airways and its plan to merge the two airlines. Finally, they put the cherry on the top by agreeing to contract terms. With the new guys. The guys in the White hats.

Or, as one of our American Airlines’ pilot readers put it, "We just told the wife ‘I’m divorcing you,’ but due to the mortgage, kids, and the fact we can’t get our money out of the bank until the CDs mature, we will probably have to live with each other for the next six months."

Don’t buy the blanket "dismissal" of the significance of what happened last week, as expressed by American Airlines CEO Tom Horton in his carefully crafted letter to his employees. This news rocked their socks.

Why We Think American Airlines Labor Leaders Are Worthy of Praise

Most of you know that over the years, I’ve had issues with any number of labor group leaders. Those guys (for the most part) who suffer from the "I’m the Important One in the Room" complex to those folks who are constantly doing what they think is the "politically correct" thing to do to ensure they are re-elected to office.

Before the objecting e-mails start filling up the inbox, this is not to say we do not think most labor leaders are smart; they are. And thankfully, just as we see happening with the quality of airline CEOs, we also see an increasing number of top airline labor leaders who are breaking out of the old mold.

That mold in the past all too often saw labor leaders focused, first and foremost, on staying in office. This is due to the way the labor bylaws are usually constructed and the way the local executive councils control the master executive councils, and so on.

Without going into all of the deep inner workings of labor politics, letís just say it can be very difficult to remain in office once you get there. And because airline labor leaders, in their effort to remain in office, are often focused on more short-term objectives and maintaining peace across the various factions within their ranks, this often doesnít leave much time for long-term strategic planning or learning how the airline business really works.

Much less how the macro-economics of the airline business have changed over the past decade or how signiicantly the industry has been impacted by consolidation.

But in the case of TWU President Jim Little, APFA President Laura Glading, and APA President Dave Bates, something very positive has clearly happened. If I didn’t know better, I’d think they had all attended a couple of "Labor Leader Excellence" courses with ALPA President Lee Moak — the guy who orchestrated the Delta Air Lines pilot deal with that airline’s management as part of its merger with Northwest Airlines.

These three labor leaders — and probably in part thanks to their advisory teams as Captain Bates has pointed out several times in interviews over the past week –took the time to understand their airlineís business plan, and then took the time to learn more about the industry as a whole. And what they saw, they clearly didn’t like.

Sure, Presidents Little, Glading and Bates are motivated by a desire to not have their membersí contracts thrown out as part of the 1113 process in AMRís restructuring. And sure, they are also motivated, to some degree, by a decade or more of crappy labor relationships at AMR.

But I think thereís more at play here and I say that because when I listened to the comments made by all three union leaders this past week, I was impressed for three reasons.

First, it sounds like they really do understand how the mergers of United and Continental, and Delta and Northwest, have put the squeeze on AMR. They also understand that the "Cornerstone" strategy is a dead-end for AMR and will not fix its structural problems. They’ve also come to learn that AMR does not simply have a "labor cost" problem; it has a network deficiency that will not be solved over the next five years by growing in five key markets (the Cornerstones).

Presidents Little, Glading and Bates get this.

But secondly, they continue to communicate this in a very calm and businesslike fashion. No yelling. No screaming. No threats. Everything is very….business like. Not emotional.

I would be happy to bet anyone a large sum of money that this was NOT what AMR management had expected.

Third — I’m still amazed that all three unions are unified in their effort. That is, they were one voice and they were speaking off the same page. Singing off the same page in the hymnbook if you will. This is a rarity, as most of you know, when it comes to workgroups, primarily because each workgroup is unique and has its own needs/issues to contend with. There are turf wars. There are all kinds of political issues that can keep this from taking place.

But the three unions have clearly decided that this is not the time to deal with one-offs, political in-fighting or unique aspects that make pilots different from flight attendants and mechanics different from pilots, etc. No, this is the time to stand together, boldly, and announce that the union leadership has a different idea for the future.

In short, Presidents Little, Glading and Bates determined that they would be informed by the possibilities of the future instead of being defined by whatís occurred in the past.

Which is more than we can say about the management team at AMR. And I would add, that has been the case, and remains the case.

Moving Forward: What Can We Expect To See In the Weeks Ahead?
So enough with the "Holy crap, what in the world ….and how in the world did they do it" comments.

Back to earth. Back to court. Back to reality.

The start of what is going to be a very long and rocky road began this week as the 1113 hearing began on Monday in New York.

Before the hearing began both TWU and APFA held a joint rally in Battery Park and then marched to the Courthouse steps. Weíre told several hundred employees and union members showed up to offer their support and yes, US Airways was mentioned a few times. The group also clearly liked saying things like "Horton Has To Go."

Since Friday, the most pressing questions we’ve received in the PB Email Bag (though we continue to also receive more complaints about United Airlines) have been centered around the question, "So what happens next?"

We picked up the phone on Monday and talked to a couple of the bankruptcy folks we know, and let them guide us through that process.

No, Marge, We Don’t Have A Merger

First, while Fridayís announcement by the American unions was a step towards a merger, and a huge one at that, it does not make a merger a foregone conclusion. I cannot stress this enough. I saw, as you did too no doubt, many, many headlines last week that indicated a merger had been announced.

No, not correct.

AMR management still controls AMR. AMR’s Board of Directors still directs the AMR management team.

That said, there is a pseudo second "Board" now in the house, and that is the Unsecured Creditors Committee (UCC). These are the people AMR owes money to and/or has broken contracts with. This is why labor holds three of the nine seats on the UCC and also why the PBGC holds a seat. Boeing and Hewlett Packard each hold a seat and the rest of the seats are comprised of bondholders, and others having claims in the case.

It’s this last set of people who are now going to become much more important.

The bondholders have one priority: maximizing their recovery when AMR emerges from bankruptcy.

In a simple case, creditors might receive pennies on the dollar or maybe a little more than that. In AMRís case, thanks to the actions of the three union groups, I’d say it is a safe bet that these bondholders now have certainly been given something to think about. These members of the UCC carry a lot of weight on the Committee, as does labor.

As you would expect, the bondholders are going to be very interested in what labor has signed up for with the US Airways’ team, and I also think they are going to be at least somewhat concerned as to whether US Airways, while it may be able to bring more value to them ultimately, might have "given away the store."

I think this is a crucial point that needs to be emphasized.

In other words, sure there will be synergies (as weíve seen with the UA/CO and DL/NW mergers, synergies are now a fact of airline mergers) but did US Airways give all of that synergy value to labor just to strike a deal?

If they did, whatís left for the bondholders over and above the standalone? And if they didnít, should that compel bondholders to become more interested in a merger over a standalone plan?

Timeline: How Long Is All of This Going To Take

This brings us to the next question I am being asked over and over. That question? "How long is all of this going to take?" Many of you also now wonder if what happened on Friday affects the original timing of the bankruptcy process.

The short answer is no, it does not change the timing.

In bankruptcy, there is a cadence set by the bankruptcy code itself and the Judge. As we know, this week AMR continues to present its case for throwing out the contracts. After that, there is a two-week period of negotiations, and then the unions have a week to present their case. The Judge then is expected to render his decision in the first week of June.

This is simply the legal process, nothing more, nothing less. These steps must be taken and this process must run its course for the 1113 hearing to conclude. No matter what happens between then and now.

But I guarantee you, a lot of things are going to be happening between now and then.

It’s just that most of it will be happening behind the scenes.

What Can We Expect To See Happen Next?

A white puff of smoke above Centreport?

Probably not.

If the rumbles I hear are accurate, I suspect we are going to see AMR management fighting like crazy behind the scenes to convince others that labor has "taken all of the synergies." In other words, they are going to try and convince non-labor members of the UCC that there is no money left for anything. That, in effect, US Airways "bought off" the unions.

That’s fine, but knowing the management team at US Airways, I doubt they would be that stupid. That’s not their style.

Then, we are going to see AMR working behind the scenes to convince anyone who will listen that their standalone plan can create more value than a merger with US Airways (which by conservative estimates would have synergies of something like 4-6% of the new airlineís combined revenues).

If AMR wants to continue to take a position that’s the opposite of the position of every industry analyst that I know of, have at it, guys. But it’s a lost cause. No way the standalone plan can create more value. There is only so much you can get out of the shrunken turnip.

Then there is this almost delusional quality to the continuing missives from management to the employees and to the media.The management team at AMR continues to attempt to downplay the defection of its soldiers. As if receiving a "no confidence" vote from 55,000 of your 70,000 employees is a "non-event."

What is US Airways Doing Now?

What are Doug Parker, Scott Kirby, and the rest of the folks at US Airways going to be doing while American is doing all of this?

I think there is one big task in front of them at this point. Labor is done. In the bag.

So now the airline has to reach out to the bondholders, the UCC. They need to explain what they managed to do with American’s labor groups and why those agreements are not "pay-offs" but in fact make financial sense. And that instead of being a negative going forward, the contracts agreed upon, as part of a merger with US Airways, make the most sense.

Meanwhile, they can’t ignore the folks on Amon Carter Boulevard.

Needless to say, if someone at Centreport stopped drinking the Kool-Aid and decided to look at what was best for the airline, and not what Tom Horton, and others, apparently think is best for them personally, we could see some traction towards a merger — and very quickly.

While I do not see nor hear any evidence of this happening at this time, US Airways should attempt to reach out to them in some fashion.

Meanwhile, US Airways will probably step up efforts to educate its employees about exactly what all this means as well. Let’s face it, the actions of last week took most all of us by surprise — so it wouldn’t surprise me if the airline engages in some more directed informational efforts over the next few weeks.

Timeline Remains Nebulous

That was a long way to answer the timeline question.

Here’s the short version.

1. We simply donít know how long all of this will take, but we do know how long the 1113 hearing will take.

2. We do know that there are probably going to be a lot of behind the scenes conversations going on during the 1113 hearing process — which is to say there will be a parallel path that enables the bondholders to learn more about the effect a merger might have on the amount of their recovery.

Meanwhile, in answer to a couple of questions concerning comments made by the UCC’s attorney on Tuesday — you need to remember a couple of things.

Ultimately, the 1113 hearing will probably play out while all of this behind the scenes stuff happens.

But this does not mean the unions have lost, nor does it mean that the UCC does not endorse a merger. It also does not mean the unions have won or the UCC does support a merger.

What it means is that the UCC and the Judge are involved in a process that must play out, and even though specific testimony or statements in Court could be construed as supportive of a standalone or not supportive of labor, it is not necessarily the case that such testimony or statements will be determinative in the Judge’s decision. It is the whole body of evidence presented that will determine his decision.

This process may feel slow to some — and certainly to line employees who will feel like the momentum was there and then just as quickly, it was gone — but from a fiduciary standpoint, the process must allow all options to be considered, and fully vetted.

This is a marathon. Or maybe better said, it is an ultra long-distance obstacle course.

Steady heads will win the race. Not losing sight of the goal, and maintaining the high road in the courtroom are things we will be looking for as this process continues.

I realize this is somewhat hard to follow, somewhat complicated, and that the actual testimony you may read and what you read in the press are sometimes hard to reconcile.

We will do our best to bring you our perspective in the weeks/months ahead. But it is most important to remember that this will be a lengthy process, and not one that will be over simply because of one press release indicating the unions now support a merger.

But back to that subject, we have to pause once more to give credit where credit is due. Certainly to Doug Parker, Scott Kirby and the US Airways team for learning from the past and for stepping up to the plate. (What was it Captain Bates said about this team — I think he called them "lean and entrepreneurial").

And a huge acknowledgement also to the Presidents and Boards at the TWU, APFA and APA for having the foresight and courage to say, "No, enough is enough. You’ve had time to put your plan into play, it hasnít panned out so well, and we see a better future ahead for our members and for American Airlines."

Folks, this is industry precedent-setting stuff and history in the making.

For AMR to lose its people in such a spectacular and stunning wayÖperhaps the most compelling piece about all of this is not financial at all in spite of the bondholders’ necessary focus on recovery.

Perhaps the most compelling thing here is the message this sends about morale. Culture. The kind of people you want to work with — and for.

What creditor really thinks that the AMR workforce would be energized enough to come to work now and do a really great job for Tom Horton and his management team?

So while we sit through the continuing 1113 hearing, and we focus more and more on the financial details of a proposed merger, as more details become known, it is my view, after the events of last week, that the bondholders and everyone interested in this case should think long and hard about the qualitative side of a potential standalone entity and what losing your people ñ in such spectacular and resounding fashion ñ really means to the present and to the future of American Airlines."

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This excerpt comes from PlaneBusiness Banter. Holly Hegeman is Editor and Publisher. Hegeman founded PlaneBusiness Banter in 1997. It is currently the most widely read weekly publication covering the U.S. airline industry. Hegeman is often called upon by members of the media to comment on the industry, and most recently was on ABC World News Tonight, commenting on the potential US Airways/American Airlines merger.

Holly is a former senior contributing editor for TheStreet.com in New York, where she analyzed the airline industry for four years. Holly also created the airline industry research area of the Motley Fool Investment website in 1995. She covered the industry for the Fool until 1997.

Prior to her founding PlaneBusiness, Holly served as senior vice-president at two Wall Street investment firms.

Hegeman also served as a consultant to then-Chairman and CEO of American Airlines, Robert Crandall from 1994 to 1995, where she worked on a number of communications management projects. She also authored the 1994 AMR Annual Report along with Crandall.

Holly is a graduate of Loyola University in New Orleans, and completed graduate level work at Griffith University, Brisbane, Australia, University of New Orleans-Innsbruck, and the University of Tennessee.

Holly was the recipient of a Rotary International Journalism Award, and is a past president of the New York chapter of the International Association of Business Communicators. She retains her membership in PRS:NY, a select group of New York-based communications professionals, and is a member of SABEW, the Society of American Business Editors and Writers.

You can follow Holly on twitter at @planebusiness or on her blog, http://www.planebuzz.com. Subscriptions to PlaneBusiness Banter are $197/year. For more information, contact [email protected]